Material, Labour and Overhead Costs Questions and Answers

Q: When prices show a rising trend, which one of the following methods of inventory valuation will result in lower income and lower valuation of inventory ?

The method is LIFO (last in, first out).When prices are rising, LIFO charges the most recent, highest-cost purchases to cost of goods sold. Cost of sales is therefore higher, so reported income is lower, and the closing stock is valued at the oldest, cheapest prices, so inventory valuation is also lower.FIFO does the reverse: older, cheaper costs go to cost of sales, giving higher profit and a closing stock at recent high prices. The simple and weighted average methods fall between the two.

Q: This technique assumes the basic principle of "vital few trivial many" while considering the inventory structure of any organisation and is popularly known as .................. .

The technique is ABC analysis.ABC analysis applies Pareto's principle of the 'vital few and trivial many' to inventory. Items are ranked by annual consumption value: a small number of A items, often around 10% of items, account for most of the value and get the tightest control, while the many C items, worth little, get simple controls.A bill of material lists the components needed for a product, EOQ is the order size that minimises ordering and holding costs, and a perpetual inventory system keeps a continuous record of stock. None of them classifies items by value.

Which of the following statement/s is/are correct?
Formulae-1: Maximum Level = Re-order Level (ROL) + Re-order quantity (ROQ) - (Minimum Rate of Consumption × Minimum Re-order Period)
Formulae -2: Minimum Level = Re-order Level (ROL) - (Normal rate of Consumption × Normal Re-order Period)

A.Only Formulae -1 is correct
B.Only Formulae -2 is correct
C.Both Formulae -1 and Formulae -2 are correct
D.Both Formulae -1 and statement-2 are incorrect

Exam Year(s)

DSSSB - 2023,

Answer: C

Both formulae are correct. In material control the maximum level is the re-order level plus the re-order quantity, less the product of the minimum consumption rate and the minimum re-order period; this is the highest stock the store should hold. The minimum level is the re-order level less the product of the normal consumption rate and the normal re-order period; this is the stock below which it should not fall. Since both are stated in the standard way, the answer is that both are correct.

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According to COST ACCOUNTING STANDARD-7 relating to EMPLOYEE COST, which of the following is excluded for the purpose of measuring employee cost

A.Remuneration paid to Non-Executive Director
B.Any payment made to an employee either in cash or kind
C.Gross payments including all allowances payable and includes all benefits
D.Any perquisites provided to an employee by the employer

Exam Year(s)

DSSSB - 2023,

Answer: A

Remuneration paid to a non-executive director is excluded from employee cost. Under the cost accounting standard on employee cost, the cost covers payments made to employees, whether in cash or kind, the gross amounts including all allowances and benefits, and any perquisites provided by the employer; these three are listed as parts of employee cost. A non-executive director is not an employee in the sense of the standard, so his remuneration is left out. The answer follows the printed key.

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Under or over absorption of overhead may arise due to which of the following causes
(i) Error in estimating overhead expenses
(ii) Error in estimating the level of production, i.e the base
(iii) Major unanticipated changes in the methods of production

A.Only (i) and (ii)
B.Only (ii) and (iii)
C.Only (i) and (iii)
D.All (i), (ii) and (iii)

Exam Year(s)

DSSSB - 2023,

Answer: D

All three are causes. Overheads are absorbed at a predetermined rate, calculated from estimated overhead expenses divided by an estimated base such as production or machine hours. An error in estimating the overhead expenses (i), an error in estimating the level of production or other base (ii), or major unanticipated changes in the methods of production (iii) can each make actual overheads differ from absorbed overheads, giving under or over absorption. So all of (i), (ii) and (iii) are right.

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Just-in-Time (JIT) Inventory System is a __________ philosophy which is used for managing all types of inventory, purchase and production functions in an organisation

A.Korean
B.Japanese
C.French
D.German

Exam Year(s)

DSSSB - 2023,

Answer: B

The Just-in-Time inventory system is a Japanese philosophy. It originated in Japan, in the Toyota Motor Company's production system, and aims to keep stock at the minimum by receiving materials and producing goods only when they are needed. The purchase, production and inventory functions are co-ordinated so that waste is reduced. Korean, French and German are not the origin of the system.

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When prices show a rising trend, which one of the following methods of inventory valuation will result in lower income and lower valuation of inventory ?

A.FIFO
B.LIFO
C.Simple average method
D.Weighted average method

Exam Year(s)

MH SET - 2019, SET Exam - 2019,

Answer: B

The method is LIFO (last in, first out).

When prices are rising, LIFO charges the most recent, highest-cost purchases to cost of goods sold. Cost of sales is therefore higher, so reported income is lower, and the closing stock is valued at the oldest, cheapest prices, so inventory valuation is also lower.

FIFO does the reverse: older, cheaper costs go to cost of sales, giving higher profit and a closing stock at recent high prices. The simple and weighted average methods fall between the two.

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This technique assumes the basic principle of "vital few trivial many" while considering the inventory structure of any organisation and is popularly known as .................. .

A.ABC analysis
B.Bill of material
C.EOQ
D.Perpetual inventory system

Exam Year(s)

MH SET - 2023, SET Exam - 2023,

Answer: A

The technique is ABC analysis.

ABC analysis applies Pareto's principle of the 'vital few and trivial many' to inventory. Items are ranked by annual consumption value: a small number of A items, often around 10% of items, account for most of the value and get the tightest control, while the many C items, worth little, get simple controls.

A bill of material lists the components needed for a product, EOQ is the order size that minimises ordering and holding costs, and a perpetual inventory system keeps a continuous record of stock. None of them classifies items by value.

Discuss in Forum

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